Laura Du Preez – (https://www.businesslive.co.za/bt/money/2017-10-14-body-ready-to-expose-opaque-investments/)
SAIFAA did not write the below article. The original can be found on the link above.
Body to expose dodgy finance products
A new organisation representing independent financial advisers plans to name and shame financial product providers that are not transparent about their companies or products.
The newly launched South African Independent Financial Advisors’ Association has sent more than 80 asset management, investment platform, unit trust and offshore investment companies a set of questions aimed at extracting information the advisers need to perform a due diligence on the companies’ products.
Most advisers who recommended failed investment products – such as the property syndication Sharemax, foreign exchange trader Leaderguard or the hedge fund of Herman Pretorius’s Relative Value Arbitage Fund – were motivated to do so by high commissions and failed to conduct adequate due diligence checks.
The Financial Advisory and Intermediary Services Act requires advisers to give you advice with “due skill, care and diligence”.
This means your adviser should take reasonable steps to determine whether a pro-duct provider can fulfil its promises to you.
Derek Smorenburg, the founder and CEO of SAIFAA, says that despite this requirement, many independent advisers are not equipped to conduct comprehensive due diligence on financial product providers.
Peter Hewett, an independent financial adviser and a former financial planner of the year, previously headed the advice business of the Efficient group and now runs his own smaller advice business, Hewett Wealth.
More nimble
He says larger financial adviser practices have the resources to assign someone to do due diligence but smaller practices do not have the same resources and tend to recommend products from large, well-established businesses. This can mean they will not recommend newer, more nimble “boutique” managers or even new life assurers with innovative products.
Recently, advisers have been relying on the due diligence investigations conducted on investment companies by investment platforms, discretionary investment fund managers or unit trust fund ratings services such as those provided by research houses Morningstar and Fundhouse.
Discretionary investment fund managers provide investment and portfolio construction advice to investment advisers, but Smorenburg says these managers, investment platforms and research houses should themselves be subject to a due diligence check before advisers trust their advice on where you should invest.
Hewett is setting up his own discretionary investment fund manager to research investment opportunities for his own clients and those of other advisers.
Smorenburg hopes to have the answers to SAIFAA’s investment due diligence questions posted within two months on an online portal for advisers who are members of the organisation.
Although the initiative is new, Smorenburg says initial indications are that the majority of companies will willingly answer the questions. Two companies have indicated that they would send standard due diligence responses, but Smorenburg says these will not suffice.
Answer the questions
If financial institutions do not answer the 28 questions SAIFAA has drawn up, the organisation will name and shame the companies that refuse to be transparent.
Smorenburg hopes that in future the organisation will also be able to conduct due diligence checks on life assurance companies and their policies, on life companies that provide guaranteed annuities, and on hedge fund managers.
Hewett says his practice employs a risk specialist who knows the details of all the life assurers’ policies, and he will not make use of new entrants to the market until it is clear a business is sustainable.
The Financial Services Board licenses and regulates financial services providers, life assurers, asset managers and retirement funds – ensuring they comply with certain requirements such as being fit and proper, or with requirements to hold capital to back clients’ claims, but it does not check the viability of every product offered.
Caroline da Silva, the deputy registrar of financial advisory and intermediary services at the Financial Services Board, says the FAIS Act does not prescribe what processes or tools should be used when an adviser conducts due diligence – advisers need to decide what is appropriate and adequate.
She says the nature of each case will determine the level and type of due diligence that is reasonable and this will be strongly influenced by the nature of the product, the product supplier and the customer.
A due diligence check may include any third party that provides a service such as administration, she says.
The FSB is unlikely to detail standards for due diligence in any legislation being worked on, but it may give guidance on what appropriate due diligence entails, she says.
Satisfy the requirement
Da Silva says that whether a particular product provider is licensed by the FSB is only one step in the due diligence process. Simply looking at the marketing material or brochures is also not enough to satisfy the requirement to act with due care and diligence, she says.
Some investment products and schemes are not registered by the FSB. At the time that RVAF collapsed, hedge funds were not regulated. Legislation has since been introduced to regulate these funds.
In terms of the recently promulgated Financial Sector Regulation (“Twin Peaks”) Act, the FSB will become the financial sector conduct authority and will regulate all financial products in terms of a new piece of legislation to be known as the Conduct of Financial Institutions Act.
Smorenburg says a full due diligence check would involve legal, accounting, banking, investment and actuarial skills.
Taken to task
The FAIS ombud has taken many advisers to task for failing to conduct proper due diligence checks and held them liable for failing to meet requirements of the FAIS Act, which obliges them to act with due skill and care.
The ombud’s rulings often highlight information that should have been apparent to advisers who have recommended failed investments – especially information that suggested that the investments were high risk and therefore unsuitable for pensioners on limited means.
But some of the ombud’s rulings have been successfully appealed against.
In December last year, the FSB’s appeal board overturned a ruling by Noluntu Bam, the ombud, against an adviser, Raj Chutterpaul, who advised a Durban man to withdraw his savings in a matured investment policy and invest in unlisted debentures in Edwafin. Edwafin was later liquidated after its directors embarked on fraudulent activities.
Bam found Chutterpaul did not conduct a proper due diligence check of the investment, but the appeal board found Chutterpaul could not reasonably have foreseen that fraud would occur.
Hewett says SAIFAA’s due diligence move is a good initiative but it will only be worthwhile for independent advisers to make use of the research if it gains recognition as a service that advisers can rely on, one that will fulfil the onus on advisers to take reasonable steps to determine if a financial product is one on which you can safely rely.